Denny's Corporation Reports Results for the Second Quarter 2007
SPARTANBURG, S.C.--(BUSINESS WIRE)--July 31, 2007--Denny's Corporation (NASDAQ: DENN) today reported results for its second quarter ended June 27, 2007.
Second Quarter Summary:
-- Same-store sales increased 2.8% at company units and 4.0% at
franchised units
-- Net income increased $9.6 million over the prior year period
to $11.5 million
-- Adjusted income before taxes increased $3.9 million over the
prior year period to $1.5 million
-- Total debt reduced by $12.5 million during the quarter through
asset sales and free cash flow
-- 28 company restaurants sold to five franchisees
-- Development commitments signed for 46 new franchise
restaurants
Nelson Marchioli, President and Chief Executive Officer, stated, "During the second quarter we continued to make progress both operationally and against our long-term value creation initiatives. Our marketing activities during the quarter resulted in improved guest traffic trends as well as a stronger menu mix. We are also quite pleased by the initial demand for Denny's restaurants under our recently launched Franchise Growth Initiative, a program designed to facilitate system growth and to strengthen our operating cash flow. Under this program, we completed the sale of 28 company restaurants in the quarter, 22 of which were sold to new franchisees. While we face persistent margin pressures from rising commodity costs and wage rates and cannot control the economic forces impacting our customers, we will continue to execute operationally and strategically in order to build the Denny's brand, and increase shareholder value."
Second Quarter Results
For the second quarter of 2007, Denny's reported total operating revenue of $240.9 million, a decrease of $2.5 million from the prior year quarter. Company restaurant sales decreased $2.7 million to $218.3 million as a result of 25 fewer equivalent units, partially offset by a 2.8% increase in company same-store sales. During the second quarter, Denny's sold 28 company restaurants to franchisee operators and closed one company restaurant. The 25 fewer equivalent units in the second quarter resulted primarily from the closure of underperforming restaurants in 2006 along with the impact of restaurants sold to franchisees in 2007.
Franchise revenue increased $0.1 million to $22.6 million as a result of a $1.8 million increase in royalties and initial fees, offset by a $1.7 million decrease in occupancy revenue. The increase in royalties and fees is primarily due to a 4.0% increase in franchised same-store sales combined with upfront franchise fees resulting from the sale of company restaurants to franchisees. The decrease in franchise occupancy revenue is due primarily to the sale of real estate previously leased to franchisees.
Company restaurant operating margin (as a percentage of company restaurant sales) for the second quarter was 11.6%, basically flat with same period last year. Product costs for the second quarter increased 0.9 percentage points due primarily to increasing commodity costs. Payroll and benefit costs increased 0.5 percentage points due primarily to the impact of higher wage rates, partially offset by improving experience in worker's compensation costs and medical benefits. Legal settlement expense improved by 0.9 percentage point due primarily to prior year increases in legal reserves.
General and administrative expenses for the second quarter increased $1.6 million from the same period last year due primarily to higher incentive compensation along with additional staffing expense.
Depreciation and amortization expense for the second quarter decreased by $1.6 million compared with the prior year period due primarily to the sale of real estate assets. Operating gains, losses and other charges, net, which reflect restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, increased $7.1 million in the quarter due primarily to gains on the sale of restaurant operations and real estate during the quarter.
Operating income for the second quarter increased $7.2 million to $24.3 million due primarily to a $7.1 million increase in operating gains, losses and other charges. Excluding these items in both periods, operating income for the second quarter increased $0.1 million to $11.3 million.
Interest expense for the second quarter decreased $3.9 million to $11.0 million due primarily to lower debt balances and improved borrowing costs.
Net income for the second quarter was $11.5 million, or $0.12 per diluted common share, an increase of $9.6 million compared with prior year net income of $1.9 million, or $0.02 per diluted common share. Adjusted income before taxes for the second quarter was $1.5 million, an increase of $3.9 million compared with the prior year loss of $2.4 million. This measure, which is used as an internal profitability metric, excludes restructuring charges, exit costs, impairment charges, asset sale gains, share-based compensation, other nonoperating expenses and income taxes.
Franchise Growth Initiative (FGI)
Denny's has made considerable progress on its strategic initiative to increase franchise restaurant development through the sale of certain company restaurants in geographic clusters outside of core company markets. During the second quarter, the company sold 28 restaurant operations and related real estate to five franchisees for net proceeds of $20.2 million. This brings the total number of company restaurants sold year-to-date to 34, yielding net proceeds of $21.9 million.
Fulfilling the unit growth expectations of this program, the franchisees that purchased company restaurants during the quarter signed development agreements to build 23 new franchise restaurants. This brings the year-to-date total for restaurant development agreements attributable to FGI to 26 restaurants.
In addition to franchise development agreements signed under FGI, the company signed development agreements in the second quarter for an additional 23 franchise restaurants in markets outside the FGI program.
The company also divested one other real estate asset during the second quarter for net proceeds of $0.9 million, bringing the year-to-date total for other real estate assets sold to four properties and net proceeds to $5.0 million.
During the second quarter, net cash proceeds from asset sales along with cash flow from operations were used to reduce outstanding debt by $12.5 million, while increasing cash balances by $12.1 million. Subsequent to quarter end, the company made a $15.0 million prepayment on its credit facility term loan, reducing the balance to $215.6 million. Year-to-date, total outstanding debt has been reduced by approximately $33.5 million.
Business Outlook
The company reiterates its previously issued full-year earnings guidance for 2007. Due to the successful start of FGI, management has updated its revenue and interest expense expectations. This financial and operating guidance for 2007 is based on year-to-date results and management's expectations at this time and excludes the impact of any additional company restaurants to be sold under FGI.
-- Company same-store sales of (1.0%) to 1.0%
-- Franchise same-store sales of 0.0% to 2.0%
-- 5 to 7 company unit openings
-- 20 to 25 franchise unit openings
-- Company restaurant revenue of $845 to $860 million
-- Franchise and license revenue of $88 to $90 million
-- Net interest expense of $44 million
-- Adjusted income before taxes of $0 to $10 million (1)
-- Cash capital expenditures of $42 million
(1): Please refer to the reconciliation of net income to adjusted income before taxes in the tables included below.
Further Information
Denny's will provide further commentary on its results for the second quarter of 2007 on its quarterly investor conference call today, Tuesday, July 31, 2007 at 5:00 p.m. EST. Interested parties are invited to listen to a live broadcast of the conference call accessible through Denny's website at www.dennys.com. On the front page of the website, follow the link to "Investor Relations." Then select the "Webcast" icon under "Upcoming Events." A replay of the call may be accessed at the same location later in the day and will remain available for 30 days.
Denny's is America's largest full-service family restaurant chain, consisting of 488 company-owned units and 1,051 franchised and licensed units, with operations in the United States, Canada, Costa Rica, Guam, Mexico, New Zealand and Puerto Rico. For further information on Denny's, including news releases, links to SEC filings and other financial information, please visit the Denny's website.
The Company urges caution in considering its current trends and any outlook on earnings disclosed in this press release. In addition, certain matters discussed in this release may constitute forward-looking statements. These forward-looking statements involve risks, uncertainties, and other factors that may cause the actual performance of Denny's Corporation, its subsidiaries and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as "expects", "anticipates", "believes", "intends", "plans", "hopes", and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: the competitive pressures from within the restaurant industry; the level of success of the Company's operating initiatives, advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy, particularly at the retail level; political environment (including acts of war and terrorism); and other factors from time to time set forth in the Company's SEC reports, including but not limited to the discussion in Management's Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company's Annual Report on Form 10-K for the year ended December 27, 2006 (and in the Company's subsequent quarterly reports on Form 10-Q).
DENNY'S CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Quarter Quarter
Ended Ended
(In thousands, except per share amounts) 6/27/07 6/28/06
--------- --------
Revenue:
Company restaurant sales $ 218,316 $221,008
Franchise and license revenue 22,626 22,483
--------- --------
Total operating revenue 240,942 243,491
--------- --------
Costs of company restaurant sales 193,061 195,314
Costs of franchise and license revenue 6,933 7,235
General and administrative expenses 17,167 15,590
Depreciation and amortization 12,480 14,120
Operating gains, losses and other charges, net (13,047) (5,938)
--------- --------
Total operating costs and expenses 216,594 226,321
--------- --------
Operating income 24,348 17,170
--------- --------
Other expenses:
Interest expense, net 10,953 14,847
Other nonoperating expense (income), net (228) 138
--------- --------
Total other expenses, net 10,725 14,985
--------- --------
Income before income taxes 13,623 2,185
Provision for income taxes 2,123 331
--------- --------
Net income $ 11,500 $ 1,854
========= ========
Net income per share:
Basic $ 0.12 $ 0.02
========= ========
Diluted $ 0.12 $ 0.02
========= ========
Weighted average shares outstanding:
Basic 93,962 92,045
========= ========
Diluted 98,967 97,741
========= ========
DENNY'S CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Two Quarters Two Quarters
Ended Ended
(In thousands, except per share amounts) 6/27/07 6/28/06
------------- ------------
Revenue:
Company restaurant sales $ 434,117 $ 446,030
Franchise and license revenue 43,576 45,446
------------- ------------
Total operating revenue 477,693 491,476
------------- ------------
Costs of company restaurant sales 384,496 390,632
Costs of franchise and license revenue 13,408 14,448
General and administrative expenses 33,093 32,819
Depreciation and amortization 25,358 28,185
Operating gains, losses and other
charges, net (15,680) (6,788)
------------- ------------
Total operating costs and expenses 440,675 459,296
------------- ------------
Operating income 37,018 32,180
------------- ------------
Other expenses:
Interest expense, net 22,294 29,490
Other nonoperating expense (income),
net (425) (24)
------------- ------------
Total other expenses, net 21,869 29,466
------------- ------------
Income before income taxes and
cumulative effect of change in
accounting principle 15,149 2,714
Provision for income taxes 2,486 380
------------- ------------
Net income before cumulative effect of
change in accounting principle 12,663 2,334
Cumulative effect of change in
accounting principle, net of tax - 232
------------- ------------
Net income $ 12,663 $ 2,566
============= ============
Net income per share:
Basic $ 0.14 $ 0.03
============= ============
Diluted $ 0.13 $ 0.03
============= ============
Weighted average shares outstanding:
Basic 93,554 91,915
============= ============
Diluted 98,796 97,435
============= ============
DENNY'S CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands) 6/27/07 12/27/06
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 47,263 $ 26,226
Assets held for sale 4,178 4,735
Other 28,431 31,835
---------- ----------
79,872 62,796
---------- ----------
Property, net 216,224 236,264
Goodwill 48,124 50,064
Intangible assets, net 64,873 66,882
Other assets 29,550 27,906
---------- ----------
Total Assets $ 438,643 $ 443,912
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Current maturities of notes and debentures $ 3,941 $ 5,532
Current maturities of capital lease obligations 6,716 6,979
Accounts payable and other accrued liabilities 123,358 123,291
---------- ----------
134,015 135,802
---------- ----------
Long-Term Liabilities
Notes and debentures, less current maturities 402,252 415,801
Capital lease obligations, less current
maturities 21,828 24,948
Other 87,762 91,379
---------- ----------
511,842 532,128
---------- ----------
Total Liabilities 645,857 667,930
Total Shareholders' Deficit (207,214) (224,018)
---------- ----------
Total Liabilities and Shareholders' Deficit $ 438,643 $ 443,912
========== ==========
Debt Balances
(In thousands) 6/27/07 12/27/06
---------- ----------
Credit facility revolver loans $ - $ -
Credit facility term loans 230,555 245,596
Capital leases and other debt 29,182 32,664
Senior notes due 2012 175,000 175,000
---------- ----------
Total Debt $ 434,737 $ 453,260
========== ==========
DENNY'S CORPORATION
Income, EBITDA and G&A Reconciliations
(Unaudited)
Two Two
Income and EBITDA Quarter Quarter Quarters Quarters
Reconciliation Ended Ended Ended Ended
(In millions) 6/27/07 6/28/06 6/27/07 6/28/06
--------- --------- --------- ---------
Net income $ 11.5 $ 1.9 $ 12.7 $ 2.6
Cumulative effect of change in
accounting principle, net of
tax - - - (0.2)
Provision for income taxes 2.1 0.3 2.5 0.4
Operating gains, losses and
other charges, net (13.0) (5.9) (15.7) (6.8)
Other nonoperating expense
(income), net (0.2) 0.1 (0.4) (0.0)
Share-based compensation 1.1 1.2 2.3 3.7
--------- --------- --------- ---------
Adjusted income (loss) before
taxes (1) $ 1.5 $ (2.4) $ 1.4 $ (0.4)
--------- --------- --------- ---------
Interest expense, net 11.0 14.8 22.3 29.5
Depreciation and amortization 12.5 14.1 25.4 28.2
Cash payments for restructuring
charges and exit costs (1.2) (0.8) (3.2) (2.0)
Cash payments for share-based
compensation - - - -
--------- --------- --------- ---------
Adjusted EBITDA (1) $ 23.7 $ 25.8 $ 45.8 $ 55.2
========= ========= ========= =========
Two Two
General and Administrative Quarter Quarter Quarters Quarters
Expenses Reconciliation Ended Ended Ended Ended
(In millions) 6/27/07 6/28/06 6/27/07 6/28/06
--------- --------- --------- ---------
Share-based compensation $ 1.1 $ 1.2 $ 2.3 $ 3.7
Other general and
administrative expenses 16.0 14.3 30.8 29.1
--------- --------- --------- ---------
Total general and
administrative expenses $ 17.2 $ 15.6 $ 33.1 $ 32.8
========= ========= ========= =========
(1) We believe that, in addition to other financial measures, Adjusted
Income (Loss) Before Taxes and Adjusted EBITDA are appropriate
indicators to assist in the evaluation of our operating performance
on a period-to-period basis. We also use Adjusted Income and Adjusted
EBITDA internally as performance measures for planning purposes,
including the preparation of annual operating budgets, and for
compensation purposes, including bonuses for certain employees.
Adjusted EBITDA is also used to evaluate our ability to service debt
because the excluded charges do not have an impact on our prospective
debt servicing capability and these adjustments are contemplated in
our senior credit facility for the computation of our debt covenant
ratios. However, Adjusted Income and Adjusted EBITDA should be
considered as a supplement to, not a substitute for, operating
income, net income or other financial performance measures prepared
in accordance with accounting principles generally accepted in the
United States of America.
DENNY'S CORPORATION
Quarterly Operating Margins
(Unaudited)
Quarter Quarter
Ended Ended
(In millions) 6/27/07 6/28/06
---------------- ----------------
Total operating revenue (1) $ 240.9 100.0% $ 243.5 100.0%
Company restaurant operations: (2)
Company restaurant sales 218.3 100.0% 221.0 100.0%
Costs of company restaurant sales:
Product costs 56.3 25.8% 55.0 24.9%
Payroll and benefits 91.9 42.1% 91.9 41.6%
Occupancy 13.0 6.0% 12.6 5.7%
Other operating costs:
Utilities 10.0 4.6% 10.7 4.8%
Repairs and maintenance 4.8 2.2% 4.8 2.2%
Marketing 7.3 3.4% 7.5 3.4%
Legal settlements 1.0 0.5% 3.2 1.4%
Other 8.6 4.0% 9.7 4.4%
---------------- ----------------
Total costs of company restaurant
sales $ 193.1 88.4% $ 195.3 88.4%
---------------- ----------------
Company restaurant operating margin
(3) $ 25.3 11.6% $ 25.7 11.6%
---------------- ----------------
Franchise operations: (4)
Franchise and license revenue $ 22.6 100.0% $ 22.5 100.0%
Costs of franchise and license
revenue 6.9 30.6% 7.2 32.2%
---------------- ----------------
Franchise operating margin (3) $ 15.7 69.4% $ 15.2 67.8%
---------------- ----------------
Total operating margin (1)(3) $ 40.9 17.0% $ 40.9 16.8%
Other operating expenses: (1)(3)
General and administrative expenses 17.2 7.1% 15.6 6.4%
Depreciation and amortization 12.5 5.2% 14.1 5.8%
Operating gains, losses and other
charges, net (13.0) (5.4%) (5.9) (2.4%)
---------------- ----------------
Total other operating expenses $ 16.6 6.9% $ 23.8 9.8%
---------------- ----------------
---------------- ----------------
Operating income (1) $ 24.3 10.1% $ 17.2 7.1%
================ ================
(1) As a percentage of total operating revenue
(2) As a percentage of company restaurant sales
(3) Other operating expenses such as general and administrative
expenses and depreciation and amortization relate to both company and
franchise operations and are not allocated to costs of company
restaurant sales and costs of franchise and license revenue. As such,
operating margin is considered a non-GAAP financial measure.
Operating margins should be considered as a supplement to, not as a
substitute for, operating income, net income or other financial
measures prepared in accordance with accounting principles generally
accepted in the United States of America.
(4) As a percentage of franchise and license revenue
DENNY'S CORPORATION
Year-to-Date Operating Margins
(Unaudited)
Two Quarters Two Quarters
Ended Ended
(In millions) 6/27/07 6/28/06
-------------- --------------
Total operating revenue (1) $477.7 100.0% $491.5 100.0%
Company restaurant operations: (2)
Company restaurant sales 434.1 100.0% 446.0 100.0%
Costs of company restaurant sales:
Product costs 111.4 25.7% 110.7 24.8%
Payroll and benefits 184.8 42.6% 185.9 41.7%
Occupancy 26.2 6.0% 25.7 5.8%
Other operating costs:
Utilities 20.8 4.8% 22.3 5.0%
Repairs and maintenance 8.8 2.0% 9.1 2.0%
Marketing 14.5 3.3% 15.0 3.4%
Legal settlements 1.5 0.4% 3.2 0.7%
Other 16.5 3.8% 18.8 4.2%
-------------- --------------
Total costs of company restaurant sales $384.5 88.6% $390.6 87.6%
-------------- --------------
Company restaurant operating margin (3) $ 49.6 11.4% $ 55.4 12.4%
-------------- --------------
Franchise operations: (4)
Franchise and license revenue $ 43.6 100.0% $ 45.4 100.0%
Costs of franchise and license
revenue 13.4 30.8% 14.4 31.8%
-------------- --------------
Franchise operating margin (3) $ 30.2 69.2% $ 31.0 68.2%
-------------- --------------
Total operating margin (1)(3) $ 79.8 16.7% $ 86.4 17.6%
Other operating expenses: (1)(3)
General and administrative expenses 33.1 6.9% 32.8 6.7%
Depreciation and amortization 25.4 5.3% 28.2 5.7%
Operating gains, losses and other
charges, net (15.7) (3.3%) (6.8) (1.4%)
-------------- --------------
Total other operating expenses $ 42.8 9.0% $ 54.2 11.0%
-------------- --------------
-------------- --------------
Operating income (1) $ 37.0 7.7% $ 32.2 6.5%
============== ==============
(1) As a percentage of total operating revenue
(2) As a percentage of company restaurant sales
(3) Other operating expenses such as general and administrative
expenses and depreciation and amortization relate to both company
and franchise operations and are not allocated to costs of company
restaurant sales and costs of franchise and license revenue. As such,
operating margin is considered a non-GAAP financial measure.
Operating margins should be considered as a supplement to, not as a
substitute for, operating income, net income or other financial
measures prepared in accordance with accounting principles generally
accepted in the United States of America.
(4) As a percentage of franchise and license revenue
DENNY'S CORPORATION
Statistical Data
(Unaudited)
Two Two
Same-Store Sales Quarter Quarter Quarters Quarters
Ended Ended Ended Ended
(increase/(decrease) vs. 6/27/07 6/28/06 6/27/07 6/28/06
prior year)
---------- ---------- ---------- ----------
Company-Owned Same-Store
Sales 2.8% (0.4%) 0.5% 2.1%
Guest Check Average 3.6% 4.0% 3.1% 6.0%
Guest Counts (0.8%) (4.2%) (2.6%) (3.6%)
Franchised Same-Store Sales 4.0% 1.4% 1.6% 3.7%
Two Two
Quarter Quarter Quarters Quarters
Average Unit Sales Ended Ended Ended Ended
($ in thousands) 6/27/07 6/28/06 6/27/07 6/28/06
---------- ---------- ---------- ----------
Company-Owned Units $ 427.7 $ 412.5 $ 843.7 $ 832.1
Franchised Units $ 379.8 $ 362.0 $ 746.3 $ 727.7
Franchised
Restaurant Unit Activity Company & Licensed Total
---------- ---------- ----------
Ending Units 3/28/07 517 1,028 1,545
Units Opened 0 2 2
Units Acquired 0 0 0
Units Refranchised (28) 28 0
Units Closed (1) (7) (8)
---------- ---------- ----------
Net Change (29) 23 (6)
---------- ---------- ----------
Ending Units 6/27/07 488 1,051 1,539
========== ========== ==========
Equivalent Units
Second Quarter 2006 535 1,028 1,563
Second Quarter 2007 510 1,032 1,542
---------- ---------- ----------
(25) 4 (21)
========== ========== ==========
###
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